Not all IRS penalties are valid

A 2019 U.S. Tax Court decision showed IRS sometimes charges penalties that are not valid and can be cancelled.

Gwendolyn Kestin timely filed her 2014 Individual Income Tax Return showing tax due and she paid it. Later, she filed an Amended return claiming what she received was not “wages” and the tax was not owed and should be refunded.

IRS found the Amended return was a “frivolous” return and assessed the $5,000 penalty under code section 6702.

She then sent IRS a letter that argued her Amended return was OK and sent a copy of the original Amended return that was stamped “photocopy-do not process.”

She sent five more photocopies of the Amended return during the year and included five more photocopies of the original Amended return. All of the photocopies were marked the same way “photocopy-do not process.”

IRS then assessed seven $5,000 penalties against Kestin. She petitioned the Tax Court but the court found the Amended 2014 return was frivolous. The court also ordered a trial to determine how many more, if any, frivolous returns had been filed by her.

The court noted all of the photocopies of the Amended return were clearly marked “copy” and found the copies did not meet the requirements of returns for purposes of the penalties under section 6702(a).

The court found she only owed one penalty of $5,000 for “frivolous” Amended return. IRS had to cancel the assessment of the other six penalties for $5,000 each.

This matter is difficult to understand. Why would IRS assess six more penalties? Kestin did the right action to petition for relief from the six extra penalties. I guess it is another instance of sometimes the penalties IRS assesses are not correct.

It indicates there are times when you should try to have penalties removed. Instead of going to Tax Court, maybe more discussions with IRS could resolve the matter. For example, sometimes penalties such as “late filing” can be cancelled by IRS if you have timely filed at least three prior years returns (and you point that out to IRS).

Did you hear “The ability to find humor in the ups and downs of life can give us a new perspective and a new way of viewing our circumstances.” Heidi Catherine Culbertson.